Yahoo Finance Builders added more homes last month, but future activity could wane
Developers broke ground on more housing units in September, but future activity could be muted.
New residential construction, including single-family homes and multifamily, increased 7% month over month in September to 1.358 million units on a seasonally adjusted basis, according to Census Bureau data released Wednesday. That's down 7.2% versus a year ago and slightly below the forecast of 1.383 million units by economists surveyed by Bloomberg.
Authorized residential permits — a sign of potential future activity — fell 4.4% to 1.473 million permits in September from August’s revised rate of 1.541 million — led by a major pullback in multifamily permits. That was also down 7.2% from the same time last year, but above the 1.453 million forecasted permits.
Adding new single-family homes is a crucial factor to alleviating some of the persistent inventory challenges homebuyers are facing on the for-sale side. Meanwhile, the severity of shortages on the rental side has subsided much more.
"Building permits and housing starts are volatile month-to-month, but their trend likely points to modest growth of new single-family construction in September despite high mortgage rates," Bill Adams, chief economist for Comerica Bank, told Yahoo Finance before the release. "Multifamily units under construction likely fell as rising interest rates made it more difficult for developers to finance new projects profitably, and as more projects started in 2021 and 2022 reach completion."
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Starts on multifamily structures with five or more units came in at 383,000 for September, up 17.1% from the month before.
In fact, apartment completions in the third quarter hit the highest levels since the 1980s, according to a report earlier this month from RealPage’s chief economist Jay Parsons. Developers ramped up rental construction during the pandemic when demand shot through the roof and rent prices were soaring.
Now as a result of the new supply, asking rent growth has flattened, only rising 0.3% year over year in September, a reversal from a year ago when annual growth was 9%.
"The influx of new supply has rapidly shifted the balance of power in the rental market back to renters," Parsons wrote. "Simply put: Renters today have a lot more options thanks to all the new supply."
That’s largely why some multifamily builders are pulling back. Permits to begin these developments were down 14% to 459,000 from August.
Single‐family housing starts in September increased 3.2% to 963,000 from August’s revised figure of 933,000. Authorizations to start new single-family development were up 1.8% to 965,000 from August.
The most recent public homebuilders to report earnings — KB Home (KBH) and Lennar Corp. (LEN) in September — indicated they were able to improve construction times and mitigate construction costs.
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But the fortunes of smaller builders are far less sanguine as higher interest rates makes it harder to get construction financing and these builders don’t have the economies of scale like larger developers to offset rising costs.
In fact, prices for roofing are up 5% to 8%, pricing on insulation is up 6% to 10%, and gypsum wallboard prices are up 20%, according to John Burns Research & Consulting.
"The long-expected price reset has not materialized, except for lumber and commodity materials," the John Burns researchers wrote. "As the cost to build homes has soared, builders have raised prices to preserve margins. Houses are now more unaffordable than ever for many prospective buyers."
Financing is also a big issue, which was one reason builder sentiment worsened this month, according to the National Association of Home Builders.
"Smaller builders work with lenders that allow them to build X number of homes, but it’s a hard stop [on more financing] until they sell before they can build more," Jody Kahn, senior vice president of research and surveys at John Burns Research and Consulting, told Yahoo Finance.
New development on the single-family for-sale market is crucial to solving the "housing affordability crisis," NAHB chief economist Robert Dietz said Tuesday after the group’s sentiment index came out.
"However, uncertainty regarding monetary policy is contributing to affordability challenges in the market," Dietz added.
Editor's note: This story has been updated to reflect new residential construction units fell compared to the forecast.
Janna Herron is the personal finance and real estate editor for Yahoo Finance. Follow her on Twitter @JannaHerron.
